Mitigating the risk of fraud
IF YOU operate a small enterprise in Jamaica, there are two very compelling reasons that make proactively mitigating the risk of fraud an urgent priority for 2023 and the foreseeable future.
The first is that historically, small businesses have always been more vulnerable to internal and external fraud and theft than large enterprises, regardless of where in the world they are domiciled. This is because by nature, small businesses often lack the financial resources, expertise, manpower, infrastructure, and processes to implement and sustain robust internal controls and anti-fraud measures that effectively prevent or mitigate the risk of loss from fraud and pilfering.
The second is that Jamaica continues to struggle with high levels of corruption permeating every level of society from politics, the public sector, the private sector, and the society at large.
Between 2012 and 2022, the country’s score on Transparency International’s corruption perception index (CPI) fluctuated between 38 and 44 out of a total possible score of 100, which would indicate the lowest possible perception of corruption.
Jamaica’s failure to score at least 50 per cent on the CPI is indicative of a serious problem with corruption. To make matters worse, even when fraud is discovered, the State and complainants struggle to bring the perpetrators to justice.
Earlier this week, The Gleaner reported that nearly 3,000 complaints of fraud involving more than $6 billion have been reported to the Jamaica Constabulary Force (JCF) in the last five years. In 2019, this newspaper also reported that between 2013 and 2018, the JCF had documented 3,400 reports of fraud, resulting in just under 2,000 arrests, and approximately 1,029 cases are before the courts for related offences.
Of the 1,029 cases of fraud brought before the court during the period, only 115, or roughly 10 per cent, resulted in convictions. All things being equal, recent history would suggest that the overwhelming majority of those accused of fraudulent crimes will not be convicted.
Unfortunately, there is no data available on the monies recovered or restitution received by alleged victims of fraud over the period. All things considered, it would be fair to say that when it comes to internal and external fraud prevention is substantially better than cure. Therefore, here are a few preventative measures that small businesses may take to reduce their vulnerability
Reduced reliance on cash, and the handling of cash in the business as this increases the exposure to fraud.
With the support of an auditor, or qualified accountant, implement internal controls including procedures and policies regarding key financial and operational tasks. This includes the segregation of duties among different employees to ensure that no single person has comprehensive authority or control over the entire transaction processes. Where there is a lack of internal controls, or a looseness in operations, there is also an increase in the likelihood and potential impact of fraud and theft.
Train and educate staff in anti fraud measures and financial resilience, particularly when it comes to transactions and operations.
Create a code of conduct that specifies in detail what is considered ethical and acceptable behaviour and business principles that all employees are expected to abide by and be held accountable to.
Conduct regular audits to help detect fraud and theft.
Consider purchasing crime and fraud insurance, which may provide coverage for losses resulting from various types of employee fraud, including theft of money, securities, or other property. This type of insurance can also cover losses resulting from forgery, computer fraud, and other forms of fraudulent activity.
On the issue of crime and fraud insurance, it should be noted that Jamaica appears to have its own unique treatment of this insurance class, which fellow Gleaner Business columnist and friend Cedric Stephens addressed, in helpful detail recently.
In a column titled “Tackling financial fraud risk”, published in this newspaper on March 27, 2023, Mr Stephens explained “local insurers, for some strange reason, call insurance that provides protection against employee dishonesty or fraud ‘Fidelity Guarantee’.
A typical fidelity guarantee policy says it “will indemnify the insured against such direct loss of money and, or goods, belonging to the insured or for which the insured is responsible at law as the insured shall sustain because of fraud or dishonesty committed during the period of insurance by any employee … in the performance of his duties and whilst employed … provided that: such fraud or dishonesty is discovered not later than six months after either the termination of the employment of the employee in respect of whom a claim is made hereunder or the expiry of this policy, whichever shall first happen; and the liability of the company in respect of such fraud or dishonesty committed by any employee during the whole period of the subsistence of this policy shall not exceed the sum stated … in the schedule and not more than one claim in respect of such employee shall be payable under this policy.”
One of the most important prerequisites for mitigating dishonesty and fraud is leadership. Leadership in managing the business and operating with integrity.
Without a culture of fairness and honesty in business dealings and operations, the ethics that has been found wanting at the top almost always trickles down throughout the business.
One love,
Yaneek.
n Yaneek Page is the programme lead for Market Entry USA and a certified trainer in entrepreneurship.